Luke Szymczak - VP, IR Maggie Wilderotter - Chairman and CEO Dan McCarthy - President and COO.

Batya Levi - UBS Securities Eric Pan - JPMorgan David Barden - Bank of America Frank Louthan - Raymond James Ana Goshko - Bank of America Merrill Lynch.

Good day, everyone, and welcome to the Frontier Communications First Quarter 2014 Earnings Report Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Luke Szymczak. Please go ahead, sir..

Thank you Liza. Welcome to the Frontier Communications first quarter earnings call. My name is Luke Szymczak, Vice President of Investor Relations. With me today are Maggie Wilderotter, Chairman and Chief Executive Officer; Dan McCarthy, President and Chief Operating Officer; and John Jureller, Executive Vice President and Chief Financial Officer.

The press release, earnings presentation and supplemental financials are available on the Investor Relations section of our website, frontier.com. During this call, we will be making certain forward-looking statements. Please review the Safe Harbor language found in our press release and SEC filings.

On this call, we will also be discussing our GAAP and non-GAAP financial measures as defined under SEC rules. Reconciliation between GAAP and non-GAAP is provided in our earnings release. Please refer to this material during our discussion. I'll now turn the call over to Maggie..

Thanks Luke, and good afternoon, everyone. Thank you for joining Frontier’s first quarter 2014 earnings call. I’m pleased to report that we are off to a good start in 2014 with another quarter of strong results in Q1.

We are optimistic about our operational and financial performance for the remainder of the year and we remain on track to close the Connecticut acquisition in the fourth quarter. I will start on Slide 5. In Q1 we delivered record broadband net adds of 37,158.

Growth was broad-based in all of our regions with market share penetration gains in 91% of our local markets. This reflects a 50% increase in the rate of residential broadband net additions relative to Q4 2013.

Our residential customer loss rate also improved by close to 50% relative to our average performance in 2013 and we improved the rate of residential voice unit declines relative to 2013 performance.

These trends reinforce the underlying strength of our operating capabilities and financial discipline and we expect these positive trends will continue throughout the rest of this year. The majority of our sequential quarterly revenue decline in Q1 was due to the impact of certain carrier settlements in Q4, lower CPE revenue and lower voice revenue.

We are disappointed that total Q1 revenues weren’t stronger. However, when you look at the monthly recurring revenue streams, there remain stable and data continues to grow. Later in this call John will provide more color on the revenue details.

In the residential segment there are several initiatives that we expect will improve our revenue performance in Q2. On May 1st, we increased the price of our Simply Broadband product from $29.99 to $34.99, which better reflects the value of that offering, given the robust capability of our network and of the comparable pricing from our competitors.

We also made selective increased pricing adjustments on other products including files video offers based on rising annual content fees. In addition the Frontier Secure Promotion for Q4 2013 has expired and all of the customers that took the promotion have now moved to standard pricing in Q2.

In Q2 we are adding a new product line to our Frontier Secure Platform, Internet of Things products. The first product that will launch this quarter is Dropcam and we have several others in the pipeline. We plan to sell a monthly premium text support service in addition to the retail price of each product.

Another incremental revenue opportunity that started in April comes from the completion of network speed enhancements in many of our markets, a greater proportion of the households and businesses can now upgrade to higher speed tiers.

In Q1 we saw an inflection in the rate that customers migrated to higher speeds and this occurred even before we expanded our speed capabilities. Dan will provide more details on this and why we are optimistic about future migration upgrades.

On the business front, incremental revenue opportunities include our new Frontier Anywhere Hosted Business Telephone System. This was introduced in the first quarter and is off to a strong start. In May, our alternate channels have begun to contribute to small business sales for the first time.

Our entire management team remains extremely focused on achieving our free cash flow targets which underpinned the continued sustainability of the dividend that our shareholders value. We delivered strong expense management in Q1 and we have several automation and efficiency projects in the queue for delivering this year.

Frontier's focus on continuous cost management will provide a strong foundation for sustaining our level of free cash flow and our dividend. Please turn to Slide 6. I'd like to take a moment to review Frontier’s operating strategy starting with revenue growth.

Over the last year you’ve seen us deliver new revenues and reduced the rate of revenue decline in existing product categories. Second, we are focused on managing our cost structure. Frontier has a long track record in driving efficiencies and delivering industry-leading margins.

Finally, we are focused on maximizing free cash flow to maintain a sustainable dividend payout ratio. Please turn to Slide 7 for a review of the key tactics we use to achieve our operating strategy. Broadband is the centerpiece of our product portfolio. Our offerings are simple and provide our customers with flexibility and choice.

Our customer interactions are hi-touch and personal, enabling us to sell customers more products and services. Finally, local engagement differentiates Frontier from our large nationwide competitors to build long-standing relationships in our communities.

Innovation and partnering reduce our time to market for new products and services, so we can be proactive and responsive to market dynamics. Examples include our DISH, Crius Energy, AT&T and Yahoo partnerships and our Frontier Secure product portfolio.

We know that both organic revenue and market share growth coupled with smart acquisitions that play to our core strengths are a winning formula for sustainable shareholder value creation. We are making good progress with the AT&T Connecticut acquisition, while conversion, integration and regulatory approval activities are progressing.

The target date for closing the transaction and flash cutting, all of the major IT systems is still Q4 of this year. We believe that Connecticut transaction will create shareholder value.

It is expected to be free cash flow accretive in the first full year and improves the security of our dividend by further reducing our dividend payout ratio in that first full year. The all cash consideration leaves no dilution for Frontier shareholders. Our employees are doing a great job of taking care of our customers and growing the business.

I want to recognize them on this call for their continued hard work, their dedication to Frontier and their customer first attitude. Their performance makes a difference each and every day. I'll now hand the call over to Frontier’s President, Dan McCarthy for the operations update. .

Thanks, Maggie. Please turn to Slide 8. Frontier delivered record broadband net additions of more than 37,000 in the first quarter. Customers like our bundles, our competitive pricing and the continued improvements in our network capabilities. This is our fifth consecutive quarter of strong broadband momentum.

Some of our accelerated pace in Q1 relative to Q4 and 2013 was a result of seasonality, but we firmly believe part of this improvement was driven by strategic investments in areas that are critical to the customer experience.

As Maggie mentioned, we had strong momentum and achieved a positive inflection point in the rate at which customers choose higher speed tiers. More than 30% of the activity was above the basic tier, up from 23% last quarter. In Q1 we substantially expanded the speed capabilities we are marketing to customers.

As of April, 74% of our customers have access to 12 megabit speed product, up from 60% in Q4. As of the end of Q1 less than 20% of our residential broadband customers were taking higher speed tier, so we have substantial runway ahead to upgrade more customers throughout this year.

The Q1 Frontier secure attach rates continue to be very strong illustrating the benefits of selling these services through our alternate channel partners. In Q1, we introduced a new broadband with Frontier Secure bundle as a standard double-play offer and it has been well received.

The improved broadband market share penetration in 91% of local markets in Q1 was not dependent on any one geographic area or demographic. We saw success against all of our major competitors and continue to see good sell momentum in Q2 but are seeing a normal seasonal impact we experienced during this time annually.

Looking ahead we have substantial broadband market share potential since our average market at the end of Q1 remains slightly above 20%. Growing share is the priority for our regions and our channel partners. Please turn to Slide 9. Last year we improved our sequential revenue comparison over the course of the year.

In Q1, our business recurring revenue performance was solid when you factor out CP seasonality, some carry dispute settlements and anticipated wireless backhaul headwinds. On the residential side, we are rebalancing our offers as Maggie mentioned to deliver an improvement in overall revenue in OpEx. Please turn to Slide 10.

With residential customer losses of only 9,600 in the quarter we have made tremendous progress in retaining customers. Residential churn improved in Q1 to 1.63% so we are making progress each quarter.

We will stay the course by focusing on customer retention for the remainder of the year as it not only enhances our revenue but keeping customers is the contributor to profitable. There is strategic and financial benches to retaining customers that only subscribe to our voice service.

Approximately 40% of our voice customers currently do not subscribe to our broadband service. Since we already have a relationship with these customers, there is a greater opportunity to sell them our broadband service as well as Frontier Secure. In Q1, the overall business segment lost customers but our market share actually remained stable.

The decline in the total number of small business customers in our footprint was primarily driven by customers going out of business not competitive losses. This leads to an improvement in actual market share of business customers despite declining units since the opportunity set of total business customers got smaller.

(In some) [ph] keeping customers continues to be the number one driver of revenue and profitability. Retention and share growth remain the major focus areas in 2014. Please turn to Slide 11. On the operating expense front, we reduced overtime and field activity with better first call resolution and fewer missed appointments.

We also initiated several IT automation projects that will improve both call center and technician productivity in the second half of this year. Please turn to Slide 12. Distribution channel partnerships continue to drive results.

In Q1, alternate channels accounted for 33% of the broadband gross additions which is down slightly from Q4 in percent terms but up in absolute unit volume. Q1 is our seasonally strongest quarter in our call center channel. As a result, our Q1 sales channel mixed skewed towards call center since we experienced our largest call volumes in Q1.

We expect acceleration in offline channels growth as additional channel partners ramp up their sales efforts in the residential as well as small and medium business segments. Customers premise equipment or CPE was down sequentially in Q1 reflecting typical seasonality for the hardware industry.

Many customers buy equipment in Q4 at the conclusion of their budget year, so Q1 is a slower quarter for sales as the pipeline gets replenished. This reduction in CPE impacted total business revenue. The good news is that we have already seen a strong close rate in CPE so far in Q2.

CPE remains a relatively small portion of overall business revenue, but it is important to the portfolio because it deepens our relationship with customers and provides monthly recurring maintenance fees. Substantial improvements has been made to our CPE product portfolio and packaging.

Our new Frontier anywhere hosted voice solution for business is off to a strong start. We are also seeing very good momentum with our robust Ethernet offerings with more than 30% growth in the first quarter relative to Q1 last year and help the sequential growth over Q4 2013 as well.

The revenue and product mix transitions in wireless backhaul continued in Q1. As I have stated on past earnings calls, we expect the full year negative revenue impact of 25 million to 30 million this year.

We expect much of this to occur in the first half of the year but the timing of tower construction and transition to Ethernet service is heavily dependent on carrier's internal schedules. This could move some of the impact to later in the year.

We anticipate further declines in the small business market for the rest of 2014 as the economy remains sluggish. Our customer accounts were reduced because of this but we expect to grow market share of available small business customers. Slide 13 updates the progress we are making on our network.

In Q1, our broadband availability expanded to an additional 59,000 households of which 5,600 were funded with the FCC Connect America Fund program known as CAF. In Q1 we used 6.4 million of CAF funds to expand household reach.

Thanks to the substantial investments made in our network over the past few years, our on-going expansion of our speed tiers has achieved new milestones. We have substantial capacity and opportunity to increase the number of customers taking higher speeds.

Now 61% of households we pass can get 20 megabits or greater, 74% can get 12 megabits and 83% can get 6 megabits. At the end of Q4 2012 only 40% of our network was capable of 20 megabits and only 50% was capable of 12 megabits, both of these measures improved by more than 20 percentage points over the last five quarters.

With regard to the Connecticut acquisition we have not encountered any unexpected integration or conversion items and we are very comfortable in our ability to execute on our plans for fourth quarter 2014 closing. I’ll now hand the call over to our CFO, John Jureller..

Thank you, Dan. I’d like to review the first quarter results. Overall Frontier had earnings per share of $0.04 in the first quarter of 2014 compared to earnings of $0.05 in the first quarter of 2013, and $0.07 in the fourth quarter of 2013.

Adjusting for pension settlement cost, expenses related to the pending acquisition of the AT&T Connecticut properties, severance cost and discrete tax items, our non-GAAP adjusted net income was $0.05 per share in the first quarter of 2014 as compared to $0.05 per share in the first quarter of 2013 and $0.07 per share in the fourth quarter of 2013.

Earlier today, the Board declared a quarterly dividend payment of $0.10 per share consistent with past quarters. Slide 14 shows our revenue composition. Our revenues for the quarter were $1.15 billion, a sequential decline of $26.3 million, or 2.2%, compared to the $4.9 million sequential decline in Q4.

Customer data and Internet services revenue decreased $11.5 million versus the fourth quarter of 2013 due to the impact of certain carrier settlements in Q4 that aren’t included in this first quarter and the previously discussed anticipated declines in wireless backhaul.

However, even with these items, data and Internet services revenue increased by 1.5% over Q1 2013. This was led by an over 9% increase in data services revenue from Q1 2013 to Q1 2014 as evidence of the company’s residential broadband growth and business data services growth.

In total, this more than offset the decline in non-switched access part of data and Internet services revenue as mentioned. Voice services revenue declined to $12.5 million or 2.5% as compared to the fourth quarter of 2013. Regulatory revenue for the quarter was $133.1 million, a decline of $2.4 million sequentially.

Total residential customer revenue was $496 million, a decline of $5.6 million sequentially with data and other revenue helping to mitigate the secular pressures of a decline in voice revenue. Business customer revenue of $525 million was down $18.3 million sequentially.

This business revenue decline was related to a decline in carrier settlements as mentioned. The seasonal decline in CPE and the anticipated step down in wireless backhaul revenue was as Dan mentioned.

We had excellent residential broadband acquisition and customer momentum in Q1 and we believe that we’re continuing to show sequential improvements in many of our recurring revenue trends.

As Maggie discussed, we continue to make adjustments in our packaging and pricing and we think we have put elements in place to improve performance over the course of the year. Slide 15 provides an analysis of our average revenue per customer.

In residential, average revenue per customer or ARPC of $59.07 represented 0.6% sequential decrease, however represents a 0.5% increase over the prior year. We’ve extended our $90.99 packages to existing customers and had a gift of security promotion that ran from November 2013 into January 2014.

This helped our customer performance but had a modest impact on ARPC for the quarter. As the promotion impacts wind down and customers continue to take and migrate to higher broadband speeds, we anticipate that on balance the ARPC trends will be favourable for Frontier.

Overall, with the tangible results in gaining customers with our lead with broadband emphasis, we know we’re continuing to take market share, driving future performance and doing the right thing for our customers. Business ARPC was 1.9% lower sequentially and 1% higher than the prior year.

Although the number of business customers declined in the quarter, we estimate that our overall market share was stable for this quarter. As shown on slide 16, our cash operating expenses increased by $23 million sequentially in Q1 and we’re down $10 million relative to the first quarter of 2013.

The sequential increase reflects seasonal upticks in payroll taxes and was in our budgets and is included in our guidance. This excludes approximately $9 million of integration related operating expenses for the Connecticut transaction. Adjusted EBITDA margin was 45.2% for the first quarter of 2014.

We remain committed to improving our operating efficiency while investing effectively to drive our business forward. We spent $135.1 million in capital expenditures for the business in Q1 and an additional $10.3 million related to the Connecticut integration activities.

Further our cap funded expenditures in Q1 were $6.4 million, we have received a total of $133.2 million to date of cap funds and have expanded a total of $44 million. Please turn to Slide 17, Frontier’s cash flow remains very healthy. On a trailing fourth quarter basis, our leverage free cash flow remained strong and was $891 million for Q1.

Our dividend pay-out ratio was 43% in Q1. We continue to focus on our free cash flow generation and maintaining a comfortable dividend pay-out ratio for our shareholders.

On Slide 18, is our leverage ratio and liquidity relative to prior periods? Frontier’s liquidity remains strong; we ended the quarter with over $1.7 billion in cash and credit availability an increase of $75 million in the quarter.

Frontier’s capital allocation framework remains unchanged, investing appropriately in our network infrastructure and operations, supporting our current dividend and utilizing excess cash generated to reducing indebtedness and our leverage ratio over time.

We are comfortable with our leverage rate levels and are committed to maintaining our liquidity along with a prudently managed balance sheet. Slide 19 shows our long-term debt maturity profile.

As we've indicated and based on how management sees the trajectory of the business we are confident in our ability to generate cash flow from our current business to fund our scheduled debt repayments through 2016 without a refinancing need.

Once completed, the addition of a cash flow from a Connecticut business will only serve to further bolster our cash generation. Related to this on May 1st, we repaid $200 million of maturing debt with cash on hand.

Our go to market plans to fund the Connecticut acquisition remains the same with the likely timing in late Q2 or early Q3 depending upon market conditions. Please turn to Slide 20; we are reaffirming our 2014 guidance, our guidance for leverage free cash flow is a range for $725 million to $775 million.

Our guidance for capital expenditures excluding expenditures related to integration activities in cap is a range of $575 million to $625 million. This guidance excludes the impact of additional revenue, EBITDA, CapEx or other cash flow items upon the acquisition of the Connecticut business.

Our guidance for cash taxes is range of $130 million to $160 million for our current business operations and our estimate of pre-close integration expenditures.

We continue to anticipate spending $225 million to $275 million on integration activities for the Connecticut acquisition with most of this occurring prior to the completion of the transaction in preparation of a flash cut of the business to Frontier’s platforms.

Presently we estimate that this could be $140 million to $170 million of operating expenses and $85 million to $105 million of capital expenditures.

In summary, Frontier’s operating results, proven capital investments and expense management provide a strong cash flow base and solid financial platform for supporting and investing in the business, servicing our debt and comfortably sustaining our dividend.

In addition to our relentless focus on our base business in the 27 states we operate in today, significant activities continue in preparation of the completion of the Connecticut transaction. With that, let me pass the call back to the operator and open up the line for questions..

Thank you sir. (Operator Instructions). We’ll take our first question from Batya Levi with UBS..

First can you help us reconcile the strong subscriber metrics we saw and the financials in the quarter? I think there were a number of items you mentioned that hurt seasonal trends. If you could quantify the impact from the carrier settlement, the lower CPU revenues and the higher payroll taxes that you mentioned that would be helpful.

And looking at margins, they were lower than what we’re looking for. Is that mostly a function of higher subscriber retention acquisition cost or were there other items, cost items that would want to highlight. And how should we think about margins going forward? Thank you..

Batya this is John, I’ll start off and I’ll let Maggie and Dan also add to this.

From a subscriber perspective, obviously it takes a little bit of time as we add new customers before they flow into our revenue base and get ramped up, so I think you’re going to see some good progress make overtime both with respect to the base customers as well as upgrade for our speed tiers.

With respect to the revenues delta which was about $26 million, about 25% of that or so was related to our on-going business excluding the wireless backhaul revenue declines and this was primary caused by the decline in voice revenues with a slight decrease in regulatory revenue. I think we said that was about $2 million of it.

So the average 75% most of this is related to what we call retrying but variable revenues that arise during the course of the year, carrier settlements in CPE in particular. This also within that was the wireless backhaul revenue decline.

So on balance when we met those things and we look at quarter on quarter, we do believe that we’re seeing improving revenue trends in the business.

On the payroll tax side, as you can appreciate, pretty much by Q4 you’ve exhausted many of the payroll tax limits to which you’re subject and that clock its reset in Q1, so this is a normal course for our business as it is for many other businesses.

We anticipated this as part of our own internal planning and that was all included in our budgets and our cash flow guidance as we laid out. And I think from a -- then finally from a margin perspective, I think our margins obviously are both a function of revenue and expense we -- our expense efforts continue unabated.

We think we'll may continuing comparative progress during the course of this year, we don’t see any reason why that even can improve as Dan described in other steps that we're taking and we think the relative comparisons on revenue will also continue to improve sequentially..

Hi Batya, it’s Maggie. So just a couple of things to add to it because I think John did a good job of talking about some of the puts and takes on revenue. But when we look at the first quarter, January typically is a slower start for us and then we built momentum for broadband in February and built even more momentum in terms of net adds in March.

So the majority of the ads will flow through in the second quarter April, May, June from a revenue perspective. So you will see a bounce in revenue especially from these broadband adds as we get through this second quarter. The other thing that I’ll mention is on the margins itself.

The first quarter is always seasonal for us we always have more expenses, stock comp expenses, payroll expenses, one timers. In addition to that this was one of the coldest winters on record for us. And we did have the mud slides in Washington State was our markets. In addition to that, we had storms in a number of locations especially snowstorm.

So we did have overtime that we had to pay in the first quarter that we traditionally don’t, our overtime was down from the fourth quarter but it was still substantial based upon some of those puts and takes. So we absolutely look at Q2 as a bounce back on margin, so you should feel good about that.

And if you look at the trends from ’13 it was similar. So this is seasonal again on the margins and the expenses that we see in the first quarter..

Our next question comes from Mike [indiscernible] with Jefferies Investment Inc..

Hey guys, thanks. Maybe just a little bit more colour on the revenue side particularly in the business area.

Just trying to sort of tie that back to what was a weaker than expected number of us at least in data and Internet revenue, business ARPC down a bit, John you mentioned CPE, what you think about it, how much of it is CPE and how much of it is potential pricing on competition, it sounded like you’re not really losing the competition, it's just business is going out.

I am just trying to get a sense for what we should be thinking about with respect to business ARPC as we progress through the year?.

Sure Mike. Most of the decline -- the sequential decline that you saw on the business side was not related to CPE, it was how carrier settlements flow during the course of the year, that was the predominant factor and for us those are recurring items but they’re variable during the course of the year.

CPE was a timing related issue as Dan indicated, our pipeline is robust in Q2 and we’re optimistic about it, so we see that as a timing issue as well. So on balance we’re very comfortable with the progress that we’re making in our business revenue streams notwithstanding our headwinds in wireless backhaul.

So small medium enterprises were taking steps and now activating our alternate channels for customer acquisition. So we believe we’re making some strong progress and I’ll let Dan comment..

Yes, the only other thing I would add Mike is that we did some targeted retention offers during the first quarter that really were designed to take customers that potentially were at higher historic prices and bundles and move them to more market based pricing on a proactive basis. And that resulted in some impact to APRC as well..

Mike, this is Maggie..

Hey, Maggie..

One of the other things that I’ll just add to what John and Dan said is we also see in the second quarter where we’re pretty excited that we have turned on some additional alternate channels for business that will start to see that flow through.

The alternate channels are also in addition to our call centers another channels are now fully selling Frontier Secure small business bundles and just to kind of give you a sense again the flow through will be in Q2, but we saw an attach rate from just our alternate channels for Frontier Secure in the first quarter of 41%.

And if you think about the Frontier Secure attach rate for all of our bundles across the board, it was 30% so very strong and so you’ll see an average revenue per customer lift also on those small businesses as we continue to push through our channels to make sure that we’re adding on Frontier Secure to their existing bundles.

The one another put and take that we made a strategic decision on and we feel good about this is I think as you know, the majority of our business customers are small when you look at the total unit counts.

And a lot of our customers are home-office customers on the business side and we simplify pricing for them that was a reduction, this is what Dan was referring to in the first quarter to make sure that for up to two phone lines or two employees for a small business, we had better aggressive pricing in the marketplace to be competitive.

And the good news is, as you look at our churn numbers across the board, we’re doing quite well and we do know that we can continue to drive that through..

Okay and sorry, John just a quick follow-up on the capital spending. The run rate obviously is below the current guide for the year.

I am assuming that’s just seasonal pressures you typically don’t spend as much in the bad weather months?.

That’s correct, Mike. Our guidance remains the same for the full year..

Our next question comes from Phil Cusick with JPMorgan..

Hi, this Eric Pan in for Phil. Just a couple of questions, if I can.

The price increase on (switching) [ph] broadband from 30 to 35, is that on the exiting customers or just new customers? And are you also increasing the rate for the bundles?.

This is Dan. The price increase is for new sales. We are not going back to existing customers and it really something focused on the simply broadband product not the bundles at this point..

But just standalone broadband..

Got it.

And as we look up to the future, when can we anticipate broadband revenue growth to sort of eventually offset the decline in voice revenue, is there a certain broadband penetration level that we should look forward to as that’s what happening?.

I think for us that’s the balance that we’re trying find and that’s where we’re working hard on every day. I think we’ve also done a pretty good job at helping to retain voice customers with some flavour of voice product.

So while we know that this is secular trend that all of us in the industry face, is we’re working hard to retain those voice customers. As Dan described, we have many of our customers in our base over 40%, 45% of our customers that are just waste customers that don’t take a flavour of broadband. They’re very important to us.

So we focus on retaining them because they’re very profitable for us. So when did that crossover point occur? I think that’s something that we’re working on and we hope that happens in the near future..

Yes, the only other thing that I would add to what John is saying here is we have some very strong plans in this second quarter in addition to driving broadband net as you saw us during the first quarter again it was a record quarter for us and we've continue to build on that momentum from last year.

We feel very good about what we’re seeing in the second quarter on momentum continuing. And that’s on the residential and business side and that’s about all channels are working on all cylinders as well as the right pricing products and offers in the marketplace. So we feel good about that.

In addition on the business side, we’re driving more Ethernet and we’re also driving expanded products to the customer base as well. Finally one of the things that we’re doing specifically on residential voice is we are coming into storm season for the summertime.

We have a lot of markets that were hit pretty hard over the last couple of years and we’re actually putting out a set of ads and a campaign and public service announcements on having a residential voice volume in your home as a protective and security measure. We do know that resonates.

We’ve talked to a lot of customers about this and so we’re going to have not just the path of pushing for broadband but also reinforcing the value of having a voice line in our real markets..

Our next question comes from David Barden with Bank of America..

Thanks for taking the question. I guess that really follow-ups on some of the stuffs that we’ve talked. So I think what I’ve heard John, would be that we’re going to have these business promotions that we're going for part of fourth quarter and the first quarter going away.

We’re raising prices for the standalone broadband but on the flipside of that, we’re going to be cutting some prices for the low-end business customer and adding the third party distribution to kind of help boost the business services sales and broadband, so I guess is the takeaway that we should look at what you’ve done in the first quarter as a good starting point for what we should expect to see for coming quarters as these things net out or is one stronger than the other? And then the second question I had was just again going back to cost side of the equation.

I know that we ended up last year with this run rate cost saves of about $100 million, was something you guys said at the beginning of the year, you kind of got there at the end of the year, so the way I think about that is at a minimum, Q1 expenses should be $25 million lower than the year ago expenses and if they’re not, which they’re not, they’re only about $10 million lower, something else got more expensive over the course of the year and I was wondering is it the third party channels are more expensive or is there some other thing that’s moving in the business behind the scenes that we’re not seeing? Thanks..

John Jureller:.

So let me just address the cost items because cost we sort of -- we have puts and takes because as compared to Q1 that’s started off at different levels and overall our headcounts are down, our compensation expense -- if you sort of -- when we peel it back, the layers, our compensation expenses and other network expenses are down versus the prior year and we continue to feel good about maintaining our cost levels and improving our margins throughout the course of this year.

As mentioned we did see the seasonal uptake and expenses versus Q4 and that was primarily due to our increase in payroll taxes. So when you net that out, we’re pretty much on that same expense level of Q4 which as you recall and as you rightly point out, was about 100 million run rate less than in 2013 as compared to 2014.

So we did feel good about that.

Overall we think Q1 is a great platform for us for the start of the year particularly when we think about broadband net adds, when we think about the pricing actions that are in front of us, when we think about the robustness of our network, when we think about customers migrating to higher speeds and new customers appearing from the success that we’ve had in Frontier and also all of the other products add-ons that Maggie and Dan have both described, is we think this sets up very well in our base business for this year and we’re very pretty excited about where we’re heading..

This is Dan. The only other thing I would add really is that I think you captured all the moving parts that we’re working on.

I would also add the speed upgrade that we accomplished and now really pushing or giving I should say customers choice to those other tiers and starting to see them respond, so we’re hoping that will be a nice positive from an ARPC perspective. And when you look at the second quarter, we do definitely see less call volume into our contact centers.

So the seasonality that traditionally has exists, still does exist in the business. We see successfully offset some of it with alternative channels and we’re going to bring more partners on and trying to turn up additional distribution channels as we got through the quarter, but we’ll still see some of that impact from that call volume decline..

David, this is Maggie. So I’ll just echo what Dan said. When I think about the first quarter cost reduction, there is a couple of one-timers in there, we always know we have higher call volumes in the first quarter and those drop-off.

We also know we have onetime comp expenses in the first quarter, those drop-off and as I mentioned we did have some overtime that was different than we normally see as you go into the second quarter and things spill out it’s a lot better environment for our technicians to work.

So I think you will see a bounce back on the margins and it will be a strong bounce back. In addition as I mentioned in my script, there is a number of automation projects we’re still doing to improve productivity in our call centers, with our technicians and also with our channels and our channel partners.

So I think you will continue to see us from a business as usual perspective drive cost out of the business.

Then shifting over to the revenue when you talked about sort of the scorecard on the puts and takes, when I think about that and I think about why we feel good about the revenues for second quarter is I think about the strong broadband net that we put on for the first quarter, I think about the simply pricing that we’ve implemented and we’ve seen no falloff of people taking that product set with the $5 increase since we put it in place.

I see that huge reductions in churn. As Dan mentioned, the number one driver of revenue in our Company is keeping customers. I look at selective price increases we’ve done on our video packaging and on several of our other bundles. We have a voice push that we put in place to mitigate the reduction of voice customers.

Our Frontier Secure attach rates and also product expansion will drive more revenues and last but certainly not least are the speed upgrades that Dan mentioned in terms of upgrading customers to 12, 20 and 40 meg across the board.

If I look at the takes against those puts, we have some selective lower package pricing but it's for a very small majority of customers on the small business side and then we also have customer -- current customer residential packages when customers want to move from product to product that in some cases could be a reduction in revenue.

But I look at those takes against the puts and I really do feel good that we have the right formula to continue to drive growth in revenue..

Our next question comes from [indiscernible] from Morgan Stanley..

Good evening. I was curious about to get an update on the AT&T acquisition, part of it is timing when do you think you’re going to file for financing here and the thoughts on closing the transaction in the fourth quarter.

And as you do the integration work upfront, what are you seeing from these lines, any colour would be helpful here? And my other question would be if you could talk about the cable offers that are currently out in the market and what you went up against in the first quarter and what you’re seeing what you saw in April?.

Okay. I’ll start on the AT&T update and I think John will probably talk about the financing. But where we are right now is as you know we’ve gotten, Hart-Scott-Rodino waiting period over.

We’re right in the middle of the [indiscernible] which is the state regulatory agency in Connecticut’s processed, in fact direct testimony has been filed and different parties are filing their testimony by the end of this week. We feel very comfortable in that process.

We still believe that we would get approval on the state side by the fourth quarter as we’ve said before. On the federal side, that process is underway as well and we’re not seeing any issues on any of the approval process at this point.

As far as the integration goes, the more we get involved with the AT&T team as well as the network here in Connecticut, we’re very impressed with the amount of investment and the quality of the network especially the areas that were built up for U-verse but that ecosystem supports that data back on to the entire state. So we’re very happy with that.

We think it’s a very good platform we have not had any surprises and we’re working diligently to be ready to cutover once we have regulatory approval..

Well, as to the financing, we continue to watch the markets closely as we’ve said late Q2 or early Q3 is a likely timing. As you’ve seen the high yield markets remain wide open, investor demand is quite frothy, buying issuance volumes are down a bit from last year so I think the cards are in our favour in that respect.

And overall rates are significantly better. I mean if we look at the indices of where our bonds trade today even as compared to our issuances last year, they are all quite favourable, so we remain optimistic about having a receptive market. We are a known issuer.

And we’ll just look closely as we continue forward, but the likely aspect will be or likely issuance will be somewhere in Q2 to Q3 to complete the financing..

And then as far as your other question [indiscernible] the competition we faced in the quarter, I would say there really wasn’t a significant change in the competitive intensity, we still experienced the Time Warner low end product offering but generally speaking in the other markets there were some speed increases and some gift card offers.

And that’s really it. And quite frankly we’ve had focused groups with our customers and for perspective customers in the market and what they say is that they don’t really know what speed they have, they just need enough and that’s really what it’s about providing a good quality product that’s reliable and gives them the speed that they need.

It’s not necessarily a 60 meg connection that they’re really never going to use and you can see that the success that we’ve had with giving customers’ choice but allowing them to pick the speed they need by the results we have in the quarter..

Yes, we’re really being aggressive in the marketplace that it’s about customer choice and flexibility not just what we want to bundle into some bundles and say and give it a headline with a big speed number.

We’ve also found interestingly enough that a lot of customers even that our customers have upgrade to higher speeds in the focus groups that we do, we find that their behaviour doesn’t really even change. It’s not like okay well they have 10 meg more so now they’re a gamer, they just keep doing the same thing they were doing before.

So what we try to do is to sell based upon their activities. What are they actually doing online and we try to match the right speeds and the right capabilities to what they do.

We still have the majority of our customers that take around 6 meg and they have choice to go up but they decide that that’s enough for what they’re doing and we’re happy to sell them just what they need.

The other thing I mentioned about the first quarter with our cable competition is let’s remember that they raise rates in the first quarter and we are not shy of pointing that out in our markets, and in addition to that keep in mind, we did grow market share for broadband in 91% of our markets in the first quarter.

So we are holding our own against the cable guys..

Our next question comes from Frank Louthan with Raymond James..

Talk just a little bit about free cash components, how are you thinking about residual bonus deprecation lift and what that might do for your CapEx budget for the rest of the year? Thanks..

Hi, Frank. It’s John. So our cash tax guidance presumes that bonus deprecation does not get extended. We don’t quite know what flavour if any may come about in terms of an extension if and when it does happen whether it’s effective for the full year, half a year, one month, we’re just not going to guess.

So our cash tax guidance assumes no extension to bonus deprecation. Anything that does come about will be an upside for our cash taxes and our overall free cash flow guidance..

Yes, Frank, just to give you a little more colour. Our top 30 people were in Washington DC last week and we met with all of the members for our 27 states. We talked up on this depreciation and how it is an incentive for capital investment in our industry and with Frontier individually and we really encourage them to get it in place and to do so.

There’s a chance that might pass but we can’t take the chance and count on it at this point since there is a lot of political insight going in Washington. But we’ll remain cautiously optimistic that they’ll get something over the finish line..

Okay great and then look at some of the -- I know that the IP transition is much more of an issue for companies that have wireless assets so forth however in the Connecticut market as you got to know those assets are a little bit better, any thoughts on IP transition in those markets that might be advantageous to you or say from a network perspective going forward, just changed to that market?.

John Jureller:.

I think, Frank, it is a little bit different because for the U-verse product set and for all customers that take it, they’re using IP switching and the entire platform is an IP platform.

So we’ll gain a lot more experience on that and see the benefits but clearly Connecticut does have that difference, but as far as the test I think we’re going to let AT&T at this point and if the FCC asked us to participate in some way I think we would consider that but we’re going to watch evaluate and take the lessons learned especially around the wholesale side because I know there is a lot of controversy on how they’ll be treated as they go through it and we just want to make sure that it goes smoothly..

Yes, we also have 48% of the state as (world) [ph] so we still have a lot base of copper in the states as well Frank, but we’re going to continue to learn. We have been on an evolution pass to IP in our company as well.

And we’re going to continue to do that in terms of going to soft switches and IP capability in our larger markets and as it makes sense we’ll look to expand that to our smaller markets. So operator, we’ll take one more question..

We’ll take that question from Ana Goshko with Bank of America Merrill Lynch..

Thanks very much. I have sort of a couple of clean up questions at end of the call.

So, on another cash item that we’re tracking for the year, the pension contribution is supposed to be a 100 you’ve made 11, then in last year you did contribute real estate and wondering how much of the contribution you expect to be in cash as opposed to real estate or other assets this year..

Hi Ana, it’s John. So we’ve indicated there our contributions for the year will be approximately 100 million as you’ve mentioned. For the purposes of our free cash flow guidance, we've assume that all of that is in cash. We’re exploring what might be the opportunity for noncash assets such as real estate and that’s to be determined.

I think we’ll have some more flexibility particularly related to our Connecticut properties and it creates another option for us as to our pension plan. But for right now, we haven’t had any specific plans other than just cash and that’s presumed in our free cash flow guidance..

We meet with our Board of Directors and our retirement committee that actually oversees our pension and we’re constantly monitoring whether there are other real estate assets that makes sense for us to put into the pension before the AT&A acquisition closes. We do have thousands of buildings, so if they make sense, we’ll look at it.

We’re not at a maximum in terms of the number of real estate assets that can be in the plan. So we do have headroom to put more in but at this point we’re being conservative, and as John said, the numbers we’re using are all cash at this point..

Okay, thanks for that.

And the Maggie in terms of the additional products and services added to the bundle, you’ve mentioned Dropcam at the beginning of the call, the first time I’ve heard you mentioned it, so I just wanted to hear how wide spread that product is and do you feel that it’s sort of an entrée into kind of the home automation security space..

It’s a great question Ana. So we signed a deal with Dropcam within the last 30 days and we’re very excited because we’re launching on (5/12) [ph]. We’ve done some quite soft launch in our Frontier Secure Premium Tech Support and we’re already selling the product, so we feel very good about that.

So if you think about this whole Internet of Things category, one of the things that we’re very good at as I mentioned in my script is partnering. And so we have been in active discussions in basically for Internet of Things category. The first is what we call Smart Tech and that’s really our premium tech support and device support.

So as customers put these different Internet of Things products into their homes and businesses, they need to have somebody they can call if they have a problem and that occurs outside of our markets in addition to inside of our market.

So we’re very excited about that, anybody who has a Dropcam product in the United States can sign up for our monthly premium tech support at $4.99 a month and we’ll support that product on their behalf. The second category is home automation, so these are things like thermostats, Wi-Fi extenders, ability to lock and unlock your doors.

There is a number of partners that we're in active discussions with in that category about rolling those products out. The third is multimedia. Dropcam would fall into that category, things about content and also music services are others and then last and certainly least, are things that we categorize as lifestyle.

That’s like pet monitoring, health and fitness again several very large well brand name players that we are in negotiations with.

And all of these products will require a level of maintenance and support that we can tag on with our premium tech support and in addition to that we’re looking at putting together an application that gives a dashboard to a customer so when they add multiple Internet of Things, they don’t have to have multiple ways to manage it they can go right to one dashboard with Frontier and be able to do everything that they want in terms of turning these services on and off, monitoring them, managing them, upgrading them and seeing what kind of service levels they’re getting.

So we’re pretty excited about that.

And I think if you look at that in conjunction with some of the energy products that we’ve rolled out with [indiscernible] as well as a small trial we’re now doing with Solar in California, there is a number of things from a new product perspective that we think will only enhance the value we’re delivering to customers in the marketplace and our revenue stream..

Well, I just want to wrap up and thank everybody for joining us for this call. We remain very excited about 2014. We're off to a solid start. I think as you can tell we’re all focused on revenue and continuing to drive broadband and to manage our cost structure so our dividend stays secure and same with our level of free cash flow. Thanks everybody..

And that concludes today's teleconference. Thank you for your participation..